Geopolitics, Trade Tensions & the Digital Lifeline
As global tensions simmer and protectionist policies gain ground, Sri Lankan exporters face a familiar but dangerous foe: tariff escalation. According to recent forecasts by Bartleet Religare Securities, if the US imposes a 30% tariff on Sri Lankan goods, the economic hit could be more damaging than most anticipate.
Simulated Impact
Here’s how Sri Lanka’s merchandise exports could play out under different geopolitical scenarios at a 30% tariff level.
| Middle East Scenario | Estimated Export Value (USD Mn) |
|---|---|
| Cease-fire (stable environment) | 13,015 |
| Mild escalation of conflict | 12,812 |
| Major conflict / Strait closure | 12,762 |
| Regional spillover (worst case) | 12,735 |
💡 That’s a potential drop of over USD 250–300 million, even in relatively calm conditions.
Why This Matters
While traditional exports like apparel, tea, and rubber are exposed to global headwinds, Sri Lanka’s digital and gig economy is quietly emerging as a safety net.
Is Sri Lanka’s Digital Export the Underrated Advantage?
Services Exports Are Leading the Way
Expected to hit USD 8.3B by 2026, with tech and BPO contributing over 40%. Unlike goods, digital services are not burdened by shipping, fuel, or tariff risk. Sri Lankan freelancers are thriving on Upwork, Fiverr, and Toptal, tapping into global demand from the comfort of Colombo or Kandy.
Gig Economy Insight
Sri Lanka now ranks among the top 30 fastest-growing freelancer economies, according to the Payoneer Global Gig Report, although Payoneer is not available for new users in Sri Lanka.
Key verticals: Graphic design, development, marketing strategy, financial consulting, and voiceover work.
What if our next export boom isn’t in a container but a codebase, campaign, or concept? But that is something we need to look at in the next section of this article.
Policy Watch
VAT on Digital Services
Effective January 1, 2025, Sri Lanka was to impose an 18% VAT on digital services, including platforms like Google Ads, Meta Ads, and Netflix.
However, 18% Value Added Tax (VAT) on digital services provided by non-resident companies to local consumers will go into effect starting October 1, 2025.
Here’s how it plays out.
| Who’s Affected? | How It Hits | Strategic Response |
|---|---|---|
| Local advertisers & agencies | Increased cost of global platforms | Shift focus to organic SEO, influencers, and local ad networks |
| Freelancers earning via platforms | Potential for double taxation | Claim export status to avoid VAT drag |
| SaaS buyers (Notion, Canva, etc.) | Price hikes | Negotiate corporate licenses or explore local alternatives |
From Tariff Shock to Digital Insurance
While the traditional export sector faces real threats from global politics and tariff regimes, Sri Lanka’s digital ecosystem is one of the most resilient, scalable, and underleveraged economic assets.
Starting October 1, 2025, Sri Lanka will impose an 18% Value-Added Tax (VAT (Amendment) Act, No. 32 of 2023 which is a key component of Sri Lanka’s fiscal reforms under its IMF program) on a wide range of digital and electronic services, whether consumed domestically or imported from overseas platforms.
This includes – Website development and hosting, Digital advertising (Meta, Google Ads, LinkedIn, etc.), SEO and digital consulting, SaaS tools used by agencies and clients (e.g., Adobe CC, Semrush, Mailchimp), Online learning platforms and e-commerce plugins, Remote service payments to foreign freelancers and consultants.
✅ Building forex reserves ✅ Stimulating credit wisely ✅ Balancing fiscal policy with innovation incentives will define whether Sri Lanka thrives or just survives the next wave of global uncertainty.
What Should Businesses Do Now?
For Exporters
✅ Diversify export markets (India, EU, ASEAN)
✅ Explore cross-border e-commerce (Amazon Global, Etsy, Shopee)
✅ Invest in digital marketing for international lead generation
For Digital Creators & Freelancers
✅ Register as exporters to avoid VAT friction
✅ Build a portfolio around high-value, low-competition services (AI Prompt Engineering, Automation, Paid Ads Strategy)
✅ Collaborate with agencies for retainer-based models
For Policymakers & Strategists
✅ Incentivise SaaS creation & cross-border payment solutions
✅ Ensure VAT policies protect digital exporters
✅ Treat the gig economy as a national economic pillar, not a side hustle
How will this tax actually be collected?
From a freelancer in another country or a massive platform like Google? Your statement doesn’t address this. There are two primary mechanisms.
Supplier Registration – Foreign suppliers (like Meta, Adobe, Netflix) would be required to register for VAT in Sri Lanka and charge the 18% tax directly to Sri Lankan consumers. This is the global trend.
Reverse Charge Mechanism (RCM) – For B2B transactions, a Sri Lankan VAT-registered business that buys a service from a foreign supplier would be responsible for calculating the 18% VAT and remitting it to the IRD themselves. This “reverses” the normal flow of tax collection.
The Competitive Disadvantage
Let’s get to the very heart of the issue.
The impact of VAT is vastly different between B2B (business-to-business) and B2C (business-to-consumer) transactions.
A large, VAT-registered company paying for Google Ads can likely claim the 18% VAT it pays as an input tax credit, offsetting it against the VAT it collects from its own customers. For them, it is primarily a cash flow issue, not a final cost.
A small, non-VAT-registered business or an individual consumer paying for Adobe Creative Cloud sees it as a direct, non-recoverable 18% price increase.
The new VAT rule actively widens the competitive gap between small, unregistered players and their larger, registered counterparts.
The large agency’s core operational costs (for software, ads, etc.) do not increase, while the small agency’s costs go up by 18%.
This makes it harder for small players to compete on price and to grow.
The Pricing Dilemma
HypeX View on these matters.
While Sri Lanka can’t avoid global shocks, it can decide where to absorb the impact and where to bounce back.
The small creator now faces a difficult choice.
Keep their prices the same and accept a lower profit margin, making their work less sustainable.
Pass the 18% cost increase on to their clients, risking being perceived as too expensive compared to competitors or driving clients to seek cheaper alternatives.
Reduce their spending on tools and advertising, which can directly hinder their ability to produce quality work and grow their business.
For non-VAT-registered creators and agencies, the 18% VAT is not a procedural tax formality; it is a direct, non-recoverable cost that diminishes their profits and weakens their competitive position.
How will the Reverse Charge Mechanism (RCM) Impact Sri Lanka?
The normal flow of tax is known as a forward charge. To put this into perspective, let’s look at the following example,
A seller of goods or services (e.g., a local web design firm) provides a service to a client. Then the seller issues an invoice that includes the price of the service plus the applicable VAT (e.g., 18%).
The client pays the full amount (service price + VAT) to the web design agency in Sri Lanka.
The web design and development company then takes the VAT it collected and pays it to the government through the Inland Revenue Department.
In this forward charge model, the responsibility to pay the tax to the government rests with the web design company in Sri Lanka.
I believe the policy makers are trying to collect the tax more efficiently by using the Reverse Charge Mechanism (RCM), which flips this responsibility to the local party.
This is the most relevant reason for the RCM because it’s impractical or impossible to force a foreign company with no physical presence in Sri Lanka (like Google, Adobe, or a freelance consultant in India) to register for and remit Sri Lankan VAT.
Imagine a VAT-registered marketing agency in Colombo needs to run a LKR 500,000 advertising campaign for a client using the Google Ads platform, which is a large digital advertising platform based in the USA, with no office or VAT registration in Sri Lanka.
The Process under RCM for VAT Registered Business
Invoice
Google Ads invoices the digital marketing agency in Colombo for exactly LKR 500,000. The invoice will not include any Sri Lankan VAT. It might state “Subject to Reverse Charge in Sri Lanka.
Payment
The Digital marketing agency in Colombo pays LKR 500,000 to Google Ads.
The Reverse Charge Calculation
Now, the digital marketing agency in Colombo’s accountant does the “reverse charge.
They must calculate the VAT that would have been charged on this service.
VAT = LKR 500,000 * 18% = LKR 90,000
In its monthly or quarterly VAT return to the IRD, digital marketing agency in Colombo performs a two-step accounting entry.
As Output VAT
They declare the LKR 90,000 as an “output tax.” This is the tax they are liable to pay to the IRD, as if they had collected it from a customer.
As Input VAT
Since this advertising campaign is a legitimate business expense, the digital marketing agency in Colombo can simultaneously claim the exact same LKR 90,000 as an “input tax credit.” This is the VAT they can deduct, just as if they had paid it to a local supplier.
The Process under RCM for Non-VAT Registered Business
Now let’s look at a business that doesn’t meet the threshold to be VAT registered. I remember this happening a few years back to advertising agencies in Sri Lanka.
Imagine a digital marketing agency in Colombo run with a 10-person staff. The team is talented but small. Their annual revenue is well below the LKR 60 million threshold, so they are not registered for VAT. This is key. They cannot charge VAT to their clients, and they cannot claim input VAT credits.
Let’s say one of their clients, a local company that’s in the Spice Exports industry, gets them to do a one-month product launch campaign. The digital marketing agency quotes a flat fee of LKR 250,000 for their strategy, creative work, and campaign management.
To execute the campaign, the digital marketing agency in Colombo needs to spend money on tools like Google, Meta, Reddit, Subscriptions like ChatGPT, Gemini, Zoho, Zapier, Adobe CC and SEMRush.
Let’s budget for those costs.
Digital Advertising Spend
LKR 100,000 (to be spent on Google and Meta ads).
Essential Software Suite Cost
LKR 45,000 Monthly
Let’s analyse this project in the scenario of before and after the VAT in a table.
| Metric | Before VAT Rule | After VAT Rule | Impact |
| Project Revenue | LKR 250,000 | LKR 250,000 | No Change |
| Project Costs | LKR 145,000 | LKR 171,100 | + LKR 26,100 |
| Agency Gross Profit | LKR 105,000 | LKR 78,900 | – LKR 26,100 |
The digital marketing agency’s profit margin was slashed by nearly 25% which shows the VAT was a direct hit to their business.
These example clearly shows that the policy, while perhaps fair to large, VAT-registered companies, places a significant and direct financial burden on the smallest players in Sri Lanka’s digital economy.
What small agencies must do from immediate triage to long-term strategic shifts?
Strategic Price Review
A blanket 18% price hike could scare away clients. So, for new proposals, clearly itemise the cost of “pass-through” expenses like ad spend.
Show the base cost, the 18% VAT on that cost, and the total. This educates the client and makes it clear you are not profiting from the tax.
Example
Meta Ad Spend – LKR 100,000 + LKR 18,000 (18% VAT) = LKR 118,000
Also, instead of raising your core service fee, add a small percentage surcharge (e.g., 5-10%) to all invoices, explaining it’s to help cover the new, non-recoverable taxes on essential operational software but this depends on the number of clients you have.
I you have the time, try creating new packages that build the cost from the ground up.
The “Basic” package might have less ad spend, while the “Premium” package, with a higher price, includes the full suite of tools and advertising, with the costs properly accounted for.
Renegotiate with Existing Clients
This is difficult but necessary because you cannot win a price war against larger, VAT-registered agencies.
Therefore, you must stop competing on price and start competing on value and outsmart with new tactics because you are small and you can adapt to changes fast.
Have a transparent conversation with your long-term clients. Explain the government’s new tax policy and how it directly impacts the cost of the tools needed to service their account.
Offer a phased-in price increase or a revised scope of work to meet their budget.
Instead of being a generalist “digital marketing agency,” become the go-to expert for a specific industry or service.
Take a look at the HypeX Philippines website, we focus on Website design and development, plus SEO only.
In Sri Lanka, we focus on web design and development, PPC, and SEO mostly.
Social Media Management will be something we offer to clients who are willing to pay the premium price or for long-term clients of HypeX.
2025 is the year single-owner/solopreneur companies bootstrap to millions. So, try to cross the VAT Threshold, I know it’s like climbing the tallest mountain, and some of you may not even want to scale to that level, but it is becoming a necessity.
The digital agencies that thrive will be those that combine these strategies. There is no legal single magic solution to this.
Conclusion
A 30% tariff may sound like a trade war headline.
But it’s really a wake-up call.
Sri Lanka’s next big export might not come in a box; it might come as a line of code, a logo redesign, a marketing campaign, or an online course. And unless we embrace that shift, we’ll keep playing defence in a game that’s already moved to a new arena.
In a world where borders close and tariffs rise, the only export that flows faster than trade lanes is knowledge.
While the government’s objectives of increasing revenue and levelling the playing field are logical from a macroeconomic standpoint, the policy’s implementation places the financial burden squarely on the shoulders of the smallest and most vulnerable entities in the digital economy.
